Wednesday, September 02, 2015

RBC as gaslighting

"Say it wasn't you"
- Shaggy

On my last post, I wrote that "RBC gaslighting knows no shame." To which Steve Williamson said "You're a real meany with the poor RBC guys." Which reminds me that it's been a while since I wrote a gratuitous, cruel RBC-bashing post! (Fortunately the "poor RBC guys" all have high-paying jobs, secure legacies, and widespread intellectual respect that sometimes includes Nobel Prizes, so a mean blog post or two from lil' old me is unlikely to cause them any harm.)

Anyway, I used the word "gaslighting", but in case you don't know what it means, here's the def'n:

Gaslighting or gas-lighting is a form of mental abuse in which information is twisted or spun, selectively omitted to favor the abuser, or false information is presented with the intent of making victims doubt their own memory, perception, and sanity.

Basically, this is what Shaggy advises Rikrok to do in the famous 1990s song "It wasn't me." Rikrok's girlfriend saw him cheating, but Rikrok just keeps repeating his blatantly absurd defense until his girlfriend - presumably - starts to wonder if she's going crazy. Another classic example is the cheating wife in the third episode of Black Mirror.

The basic 1982 Nobel-winning RBC model - a complete-markets, representative-agent theory of business cycles where productivity shocks, leisure preference shocks, and/or government policy distortions drive business cycles - has never been very good at matching the data. This didn't take long to figure out - a lot of its implications seemed fishy right from the start and required patching. Simple patches, like news shocks, didn't really improve the fit that much. The model isn't very robust to small frictions, either. And one of the main data techniques used in RBC models - the Hodrick-Prescott filter - has been mathematically shown to be very dodgy. Furthermore, the Nobel-winning empirical work of Chris Sims showed that the main policy implication of RBC - that monetary policy can't be used to stabilize the real economy - doesn't hold up.

Now, that doesn't mean RBC is a total failure. There are some cases, as with large oil discoveries, when it sort of looks like it's describing what's going on. And very advanced modifications of basic RBC - labor search models, heterogeneous-agent models, network models, etc. - offer some hope that models that rely on TFP shocks as the main stochastic driver of aggregate volatility may eventually fit the macro data.

But that's not enough for RBC fans! The idea of RBC as one potentially small ingredient of an eventual useful theory of the business cycle is not enough. RBC fans maintain that RBC is the basic workhorse business cycle model.

For example, just last year, Ed Prescott and Ellen McGrattan released a paper claiming that if you just patch basic RBC up with one additional type of capital, it fits the data just fine. As if this were the only empirical problem with RBC, and as if this new type of capital has empirical support!

A 2007 paper by Gomme, Ravikumar and Rupert (which I mentioned in a previous post) refers to RBC as "the standard business-cycle model". As if anyone actually uses it as such!

Of course, [the] view [that monetary policy is not an important factor in business cycles] was significantly strengthened by Kydland and Prescott’s (1982) seminal demonstration that business cycles could be explained with technology shocks.

As if any such thing was actually demonstrated!

There are a number of other examples.

This strikes me as a form of gaslighting - RBC fans just blithely repeat, again and again, that the 1982 RBC model was a great empirical success, that it is now the standard model, and that any flaws are easily and simply patched up. They do this without engaging with or even acknowledging the bulk of evidence from the 1990s and early 2000s showing numerous data holes and troubling implications for the model. They don't argue, they just bypass. Eventually, like the victims of gaslighting, skeptical readers may begin to wonder if maybe their reasoning capacity is broken.

Why do RBC fans keep on blithely repeating that RBC was a huge success, needs only minor patches, and is now the standard model? One reason might be a struggle over history. In case you haven't noticed from reading the blogs of Paul Romer, Roger Farmer, Steve Williamson, Simon Wren-Lewis, Robert Waldmann, Brad DeLong, John Cochrane, and Paul Krugman (to name just a few), there is a very contentious debate over whether the macro revolutions of the late 1970s and early 1980s were a good thing or a wrong turn. If RBC was refuted - or relegated to a minor role in more modern theories - it means that the Lucas/Prescott/Sargent revolution looks just a little bit more like a wrong turn. But if RBC sailed on victorious, then that revolution looks like an unmitigated victory for science. We may be through with the past, but the past is not through with us!

Or maybe RBC represents a form of wish fulfillment. If RBC is right, stabilization policy - which, if you believe Hayek, just might be the thin edge of a socialist wedge - is just a "rain dance". Maybe people just really hope that recessions are caused by technological slowdowns, outbreaks of laziness, and/or government meddling.

It could also be a sort of high-level debating tactic. Paul Krugman talks about how Lucas and other "freshwater" economists basically failed to engage with "saltwater" ideas, preferring instead to dismiss them (Prescott and McGrattan's paper does exactly this). Maybe the blithe insistence that RBC is the standard model is simply a dig at a competitor.

Anyway, whatever the reason, it's kind of entertaining to watch. For those who are secure in the knowledge of their own sanity, watching people try to gaslight can be a form of entertainment. And besides...who cares about any of this? It's not like anyone who opposes stabilization policy ever needed an RBC model to back them up.

That's a thought. But perhaps the implication is there that somebody is being gaslighted. If that's right, I'm pretty sure the gunman in the ghillie suite is the one doing the gaslighting. So the question is, who's being gaslighted? The cow, or the people the gunman is hiding from (with the cow giving him away)?

I agree it is hard to come away and believe money has no real effects. But equally it is hard to find any macroeconomist that believes money is the most important driver of economic fluctuations. Even if the modern-day hard core RBC types (who there are a relatively very few) are wrong about money and output that does nothing to impugn their research agenda, their models still advance and pursue other avenues. They may uncover other important shocks, or they may help us understand show shocks are propagated across the economy. That is, they may even help us understand the monetary transmission mechanism. The original RBC models did just that. Long and Plosser was the first generation RBC model that in many ways is the framework that all modern day macro models are built. Science and starts with specialization which eventually leads to integration.You give readers the false impression that most macroeconomists build models to further a policy agenda. There are a few people guilty of that, but most macroeconomist hope to first understand how the world works with a hope that ideas from the models may one day influence future policy.

"If business cycles were simply efficient responses of quantities and prices to unpredictable shifts in technology and preferences, there would be no need for distinct stabilization or demand management policies and certainly no point to such legislation as the Employment Act of 1946. If, on the other hand, rigidities of some kind prevent the economy from reacting efficiently to nominal or real shocks, or both, there is a need to design suitable policies and to assess their performance. In my opinion, this is the case: I think the stability of monetary aggregates and nominal spending in the postwar United States is a major reason for the stability of aggregate production and consumption during these years, relative to the experience of the interwar period and the contemporary experience of other economies. If so, this stability must be seen in part as an achievement of the economists, Keynesian and monetarist, who guided economic policy over these years."

I actually might agree with a weak form of RBC, if you define "technological slowdown" as "increased difficulty of check-receivers in making persuasive arguments why check-signers should sign them a check". e.g. in 1998 you can make a persuasive argument why a check-signer should sign a check for your .com. In 2002, not so much. in 2003, you can make a persuasive case why a check-signer should sign a check for your mortgage. In 2007, not so much.

The problem with defining "technological slowdown" in this way is that it suggests an obvious role for policy in ending the "technological slowdown" by signing some checks in place of the customary check-signers.

Check-signer, check-signer, sign me a check. . .

Also: https://www.youtube.com/watch?v=IgoB2JMEowc

Perhaps the definition of an economy in trouble is one in which the reasons why people are signing checks are based on wrong-headed, unrealizable expectations.

I think one good role for RBC would be examining the EZ crisis. Contra most people discussing it, it didn't seem to be any ordinary demand shock (or, alternatively, it was an ordinary demand shock with the stickiest prices ever recorded in history).

Obviously monetary policy is very important in business cycles. The inverted yield curve before most U.S. recessions is proof enough of this. Most (though by no means all) business cycles are NGDP growth shocks.

I'll answer my own question. If we take a standard NK model, with a policymaker who behaves optimally, then essentially the time series this model produces will look just like the time series from the underlying RBC model. So, if you think the RBC model does a crappy job of fitting the time series, you have to think that NK does a crappy job of fitting the time series. A few blog posts back, you commented on a paper by Woodford, in which Mike took a stock NK model, and added some truncated forward-looking behavior. You commented very approvingly about that exercise. Apparently that was a work of genius.

I guess I'm wondering what your goal is. Are you trying to report on science, or are you trying to sway opinion?

I guess I'm wondering what your goal is. Are you trying to report on science, or are you trying to sway opinion?

Well, both! But I'm not trying to sway opinion toward NK models. There are lots of ways that they don't fit the data either. I'm trying to sway opinion against the idea that "it takes a model to beat a model".

"I'm trying to sway opinion against the idea that "it takes a model to beat a model". "

Toward what? It takes a model to beat a model seems like a good principle.

What I'm thinking is that you should try to shoot higher. Try to be more than just the hipster DeLong, i.e. calling people stupid, but doing it in a more entertaining way. The issue you're addressing in this post is basically old fart business. RBC is by now just part of the fabric of what we know. Everyone who cares understands what it's good for, and what it's not good for. Certainly not the burning issue it was 30 years ago, when dinosaurs walked the earth.

Noah, it looks like Stephen doesn't want any (your?) cookies. (Sorry, that wasn't supposed to sound dirty!). Being the low information commentator that I am, I'm also confused by what's wrong with one model putting another model to rest. People who claim they're not using models (and are instead "letting the data speak for itself") are probably just using implicit models, aren't they? Do you disagree?

"But how much do you smooth? That's a really key question! If you smooth a lot, the "trend" becomes log-linear, meaning that any departure of GDP from a smooth exponential growth path - the kind of growth path of the population of bacteria in a fresh new petri dish - is called a "cycle". But if you don't smooth very much, then almost every bend and dip in GDP is a change in the "trend", and there's almost no "cycle" at all. In other words, YOU, the macroeconomist, get to choose how big of a "cycle" you are trying to explain. The size of the "cycle" is a free parameter."

If the approach you're taking is that there is trend, and we're going to explain that with one theory, and then there is the cycle, and we're going to explain that with another theory, then you have to take a stand on what is trend, and what is cycle in the data. I've never seen an approach to doing that - HP filter, linear trend, band pass filter - that is not arbitrary. With the basic RBC model - which is basically a stochastically disturbed optimal growth model - there at least seemed the hope that you could have a unified theory of growth and cyclical fluctuations. But that's not the approach people took to the problem.

The issue you're addressing in this post is basically old fart business. RBC is by now just part of the fabric of what we know. Everyone who cares understands what it's good for, and what it's not good for. Certainly not the burning issue it was 30 years ago, when dinosaurs walked the earth.

Well, first of all, didn't you just say that NK models with optimal policy look a lot like RBC models? Well, in that case, given the importance of RBC models at central banks, it seems like it might be an issue.

Second, RBC may be old hat in the business cycle literature, but in other fields, like finance and labor, plenty of people are still using TFP shocks as the main stochastic driver.

Third, the "gaslighting" I point out in the post obviously shows that RBC ain't as dead as you might think! In fact, I bet a lot of people outside the core business cycle literature still basically believe in an RBC view of the world.

Toward what? It takes a model to beat a model seems like a good principle.

"Well, first of all, didn't you just say that NK models with optimal policy look a lot like RBC models? Well, in that case, given the importance of RBC models at central banks, it seems like it might be an issue."

Central banks are not always on the frontier of research, so the fact that they use something is not evidence that the thing is current. For example, you may think that large (i.e. hundreds of equations) macroeconometric models were debunked long ago as policy tools. But there are central banks where policymakers take the output from such models very seriously. Central bankers can move at a glacial pace.

"in other fields, like finance and labor, plenty of people are still using TFP shocks as the main stochastic driver."

Of course those then are not RBC models - RBC is a particular animal. Sure, there are people who have studied Mortensen-Pissarides with technology shocks, but that was done for the first time a long while ago (Andolfatto AER 1996). Since then, people have done money and Mortensen-Pissarides, for example.

"RBC ain't as dead as you might think!"

Not dead, just not very interesting anymore. This is just running through issues that have already been resolved. TFP shocks aren't everything. What is a TFP shock anyway? We want to think about frictions beyond Arrow-Debreu. Sure, we know.

"Any time you make any kind of causal statement about economics, you are at least implicitly using a model of how the economy works. And when you refuse to be explicit about that model, you almost always end up – whether you know it or not – de facto using models that are much more simplistic than the crossing curves or whatever your intellectual opponents are using."

Pardon my ignorance about modeling, I'm just a layperson. But isn't this functionally equivalent to saying "Even if it turns out that all of us don't know s--- about something, we need to keep pretending that we do."?

@Eric & @Anonymous: I'm a layperson as well, but I think models can help you tell when you know jack shit about something: you build models. It goes without saying those models better do a reasonable job of explaining the past, but when they suck at predicting the future, then that tells you that you don't know jack shit about what you're modeling. At LEAST they can do that! ... and that's a valuable thing to know. Why? Because then you know you'd better keep looking for a better model.

Other ways of knowing things (consulting the oracle at Delphi, dowsing, sacrificing a goat and reading the entrails, etc), have all pretty much sucked throughout history: they're a lot more unreliable ways to know things.

Pardon my ignorance about modeling, I'm just a layperson. But isn't this functionally equivalent to saying "Even if it turns out that all of us don't know s--- about something, we need to keep pretending that we do."?

The gaslighting has been going on for decades, at least since the late 1970s and Lucas-Sargent's piece "After Keynesian Macroeconomics" that "rewrote" macro history of the previous 10 years.* After its success, they extended it with some very sophisticated trolling: in the early days of RBCs, a common criticism was the very idea of negative technology shocks. Critics did not realize that RBCs were themselves one of the best examples since the fall of the Roman Empire of negative technology shocks, deliberately so. The development of RBCs is best seen as an attempt to persuade by demonstration that negative technology shocks are not only a very real possibility, but phenomena that occur often enough in the real world that they must be taken seriously. If they can slow, stop or reverse growth in macroeconomics, why would anyone be confident that they cannot do the same in the macroeconomy? I suspect that Lucas, Sargent and Prescott were surprised by the overwhelming success of their 2 pronged assault on Keynesian macro and were initially planning on using RBCs merely to soften up the field for an alternative model that was even weirder.

*It had not actually yet been written, but most of the audience had lived through it and should have known better.

Goid post. Everybody toots their own horn. Gaslighting is also what Krugman does with ISLM (model Hicks himself conceded as useless) - the model is terrible at predicting rates, has failed for three decades, nobody using it saw a single recession coming, Krugman made crazy wrong predictions with it in the 2000s but if you read him it is the best thing since sliced bread. Like you say: it is amusing to watch from the side. Another hilarious example is Scott Sumner. This is what mainstream econ is, both sweetwater and saltwater, rewriting history and gaslighting.

"What I envision is that at some point, we have about 10 years now until the baby boomers hit the United States." "I think, where in that 10 years the crunch comes, I don't know. I think there's a real possibility that next year or one or two years from now, when they see that actually the same irresponsible tax cuts as the solution to everything continue, we might have a crisis that soon but more likely towards the end of the decade." Paul Krugman 2004

Social Security going broke 10 years from 2004, that's ... this year!

"What will that plunge look like? It will certainly involve a sharp fall in the dollar and a sharp rise in interest rates. In the worst-case scenario, the government's access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos."Krugman 2003

I guess my disagreement with Krugman is that the difference between helicopter money and ordinary fiscal stimulus is that helicopter money stimulates without increasing the risk of insolvency, or the risk of greater debt servicing.

If you really think that RBC-based "labor search models" are a positive thing, your experience in job searching must be similar to that of tenured professors who do consulting from their sinecure and consider that "searching."

I think it would be a good idea to include as examples of gaslighting the 1940 British/1944 American movies titled "Gaslight" which first inspired the term. I've only seen the American version; it's quite creepy. The plot of the movie makes the reason for using that word perfectly clear.

Bashing RBC theory? What is this, the 90s? Nobody is advancing the point that the economy behaves like RBC predicts! Nobody believes inflation is inconsequential. You are missing the woods while staring at the tree.

And don't forget Steely Dan's " Gaslighting Abbie" on their Two Against Nature album. While the lyrics are somewhat dense, it appears that the married narrator is, with his lover's help, trying to drive his wife insane.

This might be a good place to ask. Over at Mean Squared Errors blog, the author refers to a 1978 paper by Lucas and Sargent:

In their response to Benjamin Friedman's comment on their provocative paper, titled "After Keynesian Macroeconomics," (1978) Lucas and Sargent wrote this:In his concluding paragraph, Friedman objects to our "rhetorical profile," an objection which several others also expressed at the Conference. To illustrate his point, he cites our reference to "wildly incorrect" predictions of Keynesian macroeconometric models, to "the spectacular failure of the Keynesian models in the 1970s," or their "econometric failure on a grand scale." These phrases were intended to refer to a specific and well-documented historical event. In 1970, the leading econometric models predicted that an inflation of 4 percent on a sustained basis would be associated with unemployment rates less than 4 percent. This prediction was not one which was teased from the models by unsympathetic critics; on the contrary, it was placed by the authors of these models and by many other economists at the center of a policy recommendation to the effect that such an expansionary policy be deliberately pursued. Source: After the Phillips Curve (pp. 81-82, emphasis added)

Nobody has identified the event over there. Perhaps someone here can help me out? I am extremely curious, although I don't know why, since I am not an economist.

They are not really equivalent. We are able to test at least to some degree the various RBC models empirically, and they have not done very well. OTOH, the problem with string theory is that so far the kinds of tests that have been suggested are simply not doable at this time due to the amounts of energy required to do them, which we are not currently capable of producing. So, string theory must wait for empirical testing until someone figures out a way to do so with our current capabilities. Not the same situation at all, with the inability to test string theory even remotely opening up the door toe places like the Perimeter Institute where Lee Slonim oversees a bunch of people proposing all sorts of nifty theoretial alternatives to it, none of them testable either, although it is fun to cook them up, and the place is fascinating as all get out, the only building I have seen where all the walls are blackboards (and covered).

I think RBC has been extremely successful within academia, and much of that success is through its genetic child school NK. Both schools are escapist diversions from serious thinking about the cycle, and probably the best thing about 2008 crisis was how clearly it exposed that.

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My introduction to the history of technology came via James Burke's "Connections" being rebroadcast on TLC back when cable station names actually bore some correlation to their content in the early 1990s. That either led to or was inspired by a sequel series called "Connections 2" which contained an old music hall song about gas lights of the literal variety, which was in turn stored away in the lumber yard of my mind until your post made me look it up, Noah.

"Underneath the gas light's glitter,Stands a fragile little girl;Heedless of the night winds bitter,As they round about her whirl.While the thousands pass unheedingIn the evening's waning hours;Still she cries with tearful pleading,Won't you buy my pretty flowers?"

Here's the link to the YouTube version of the episode in question.

https://youtu.be/DEPKGsk26vU?t=943

Or, perhaps better, an old recording of the song.

https://www.youtube.com/watch?v=TGE6SME3t2I

It lends itself to a still more degrading image of RBC theorists than practitioners of the Shaggy Defense.

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